During Monday's European trading session, the EUR/USD currency pair is rising and trading near 1.1180. The euro is receiving support against the US dollar from the more hawkish rhetoric of the European Central Bank (ECB).
Last week, ECB President Christine Lagarde said that the bank's economists were assessing a wide range of economic indicators to determine whether an interest rate hike would be necessary at the next meeting. Meanwhile, rates were left unchanged in October. "By December, we will have a substantial amount of data that will help us determine whether further rate hikes are needed," Lagarde said.
Lagarde's speech received a score of 6.2 out of 10 on the FXS Speechtracker scale, slightly above the historical average of 5.6. This points to a more hawkish tone from the regulator. Her statement that "the tools at our disposal still need to be used to prevent an uncontrolled acceleration in inflation," together with her emphasis on a comprehensive assessment of the data ahead of the December meeting, reflects the ECB's hawkish stance, which is supportive of the euro. At the same time, Lagarde acknowledged that it is often difficult to distinguish between supply and demand shocks.
Her remarks that US tariffs are unlikely to be revised in the near term and that the US midterm elections could eventually affect the country's trade policy point to continued external risk factors that could sustain inflationary pressure in the eurozone. Her description of the current situation as a combination of an energy shock and the impact of artificial intelligence technologies—factors affecting the economy in opposite directions—highlights the uncertainty surrounding the regulator's future policy decisions.
Nevertheless, the ECB's determination to fight inflation creates downside risks for the US dollar against the euro. If markets begin pricing in a more hawkish ECB monetary policy stance, the dollar could weaken in the near term.
At the same time, signs of a recovery in the US labor market could support the US dollar and limit the upward potential of EUR/USD. The US economy added 165,000 jobs in October, significantly exceeding analysts' forecasts, compared with an increase of 60,000 a month earlier. Meanwhile, the unemployment rate fell to 4.1%. The published data point to continued resilience in the labor market and support expectations of a possible interest rate hike by the Federal Reserve (Fed) in December.
ING analysts describe the euro's recent performance as "rather weak" and emphasize that even a "significant sell-off in US technology stocks did not trigger a noticeable increase in buying in EUR/USD." According to the experts, "European institutional investors continue to maintain low hedge ratios on their US assets," while the anticipated demand for the single currency has yet to materialize.
ING believes that "international investors still prefer to allocate funds to the US dollar. In other words, this is a shift into cash rather than a widespread abandonment of the dollar." The bank notes that this movement is further supported by "a return to traditional correlations, under which US Treasury bonds are once again viewed as safe-haven assets."
From a technical perspective, EUR/USD is attempting to break above the 20-day simple moving average (SMA). If the pair succeeds and consolidates above the psychological 1.1200 level, the next obstacle will be the 1.1240–1.1270 level. The latter level marks the boundary of the current trading range. If the pair fails to break above this zone, the price could return to 1.1135. A failure to hold above that level could open the way toward the psychological 1.1100 level. Meanwhile, the oscillators are in negative territory, confirming the bears' advantage.
